It happened again. Yet another disastrous quarter of financial results for Apple, Inc. Disastrous? How could it be worse?
For the third straight quarter Apple has failed to meet Wall Street’s expectations. Apple’s most recent failure is trumpeted from every analyst, prognosticator, headline, webpage, and TV screen.
What they’re not telling us is that the rules to the game have changed, and Apple is a victim.
Hidden In Plain Sight
What’s going on is obvious but not talked about too much in the financial arena. Apple has had a good decade. First, the iPod, then iTunes Music Store, iPhone, and iPad set the standards.
Apple would offer guidance to Wall Street for the upcoming quarter, and then, because sales of everything with an Apple logo on it grew faster than predicted, Apple would blow through the numbers.
Quarter after quarter the same scenario played over and over. Wall Street came to expect that Apple would offer conservative guidance for the next quarter, introduce a revolutionary, disrupting product every year, and then exceed even Wall Street’s inflated expectations.
That was then, and this is now. The best Apple can do these days, under the reign of CEO Tim Cook, is exceed their own conservative guidance– buy a little, but not enough to impress anyone.
Apple’s once high-flying stock, which catapulted the company’s value to another planet, has shed value faster than people lined up to follow Noah onto the ark.
How much shedding? Just yesterday Apple’s stock dropped by a market value of two RIMS and two Nokias.
Bad Numbers Everywhere
What horrible sin has Apple committed? It has little to do with numbers and everything to do with expectations. Apple just reported record revenue, record profits, record iPhone sales, record iPad sales, and record weekly revenue that was almost 30-percent higher than last year.
And that’s bad why? Because Wall Street has changed the rules of the game. Apple is not doing anything different this year than last, and didn’t do anything different last year than years past. Record revenue, record profits, record product shipments just don’t mean what they used to mean.
Wall Street values risk takers like Amazon, cash cow milking machines like Google (the former doesn’t make money, and the latter has only a single leg on the stool, but still…). Apple, once a Wall Street darling, is on the outs because it’s been three long years since the company disrupted an industry.
The rules have changed for Apple. Wall Street doesn’t want stellar financials. Microsoft has turned massive profits for the past decade but the stock price remains flatlined. Apple’s stock was driven into the stratosphere by the market, and the same market has turned on the company for merely repeating the quarterly performance.
DoubleLine CEO Jeff Gundlach.
I think this is really a broken company that is over-owned.
Translation. The sky is falling. Sell now.
Yes, I know. That’s absurd. And that’s how Wall Street works. What’s really broken with Apple? The company’s inability to surpass overinflated expectations. It’s as simple as that. Almost.
The Post-PC Era vs. Law of Big Numbers
Not much attention was paid to Apple’s Mac sales. The year before, in the same quarter, Apple sold 5.2-million Macs. This past quarter, Apple sold 4.1-million Macs. That’s a huge drop. Part of the difference is attributed to the number of weeks in the quarter, 13 vs. 14. Even adjusting the weeks to comparable math, the Mac sales drop herald a new event.
The post-PC era is here and in force. Apple sold over 22-million iPads, but just over 4-million Macs.
As you rummage through the Chicken Little headlines and what passes for analysis from Wall Street and tech pundits, note that Apple’s revenue and profits did not drop. They are at record levels. So, why all the sky-is-falling shouts?
Revenue and profits are slowing down. They’re growing slower as a percentage over previous growth rates. Rates. Not actual numbers. Once a company hits $100-billion in annual revenue, growth of 20-percent requires another $20-billion in revenue in just a year. That kind of growth rate is difficult to maintain, regardless of how stellar the finances.
Regardless, the drop in Mac sales is a watershed moment. Desktop and notebook PCs won’t disappear from the face of the earth any time soon, but the world is moving rapidly toward mobile devices, where, interestingly, Apple sits in a better position with iPhone and iPad than it ever, ever did with the Mac.
The Crazy Argument Crowd
With Apple on the ropes, against the wall, and being dragged across the coals of ridiculous analysis, be prepared for the craziest round of What Apple Must Do Now opinions you’ve ever heard or read.
Here’s a few examples of crazy.
‘The iPhone 5 hasn’t caught on‘ because it only accounted for half of Verizon’s iPhone sales in the past quarter. Yes, supply has been constrained. But amid the calls for Apple to make a cheaper iPhone, the two cheaper iPhones– iPhone 4 and iPhone 4S– seem to be selling well at Verizon and AT&T.
No one wants to talk about the fact that the iPhone line outsold the Android line in the U.S. by about 2 to 1. Wall Street can’t mention that because it doesn’t fit the Samsung-is-the-new-Apple narrative. What’s perplexing about Apple’s soured relationship with Wall Street is why the obvious seems so well hidden to analysts, technology media, and Apple critics.
That said, could Apple benefit by having an entry-level, unlocked, lower priced iPhone model? Yes. Maybe not in the U.S., but certainly in countries where carriers don’t subsidize smart phones.
‘The iPad mini is being beaten by Google and Amazon.’ Beaten how? Price. Forget the fact that the iPad outsells cheaper tablets, and remains inventory restrained. Apple is required to match competitor’s hardware bullet points to be considered worthy, despite the fact that Apple has never worried much about competing with any product on bullet points (RAM, storage, price, CPU, et al).
That argument alone is crazy nonsense. Google, Amazon, and Samsung do not release sales unit numbers for their competing tablets. Somehow, Wall Street has decided that the true mark of a company has little to do with financials, and more to do with hubris and attitude than financial performance.
Apple, under co-founder CEO Steve Jobs, had plenty of bravado, hubris, and attitude, perhaps manufactured within Jobs’ famous reality distortion field. Tim Cook, the man who makes everything work, is a seasoned, experienced, and highly capable executive, but he lacks Jobs’ hubris gene, and Wall Street seems to be in love with bravado these days. Witness Google’s CEO, Amazon’s CEO, and others who regularly taunt Apple, attempt to be Jobs-like in public demeanor, but have yet to show they can disrupt an industry and make a profit at the same time.
Until Apple disrupts television or clothing or electricity, it’s likely that Wall Street will continue to treat the company the way it has treated Microsoft in recent years; with disdain and disrespect. The only problem is that Microsoft, while profitable, has failed to disrupt and create new industries, while Apple does it every few years. And Apple is due.
About Kate MacKenzie
Superb article with great insights. Once you understand the things that Wall Street investors and “experts” value versus the things they don’t (record profits, record revenue, solid financials and growth) you understand more fully the financial collapse of 2008. Think of it this way, Apple just reported the most profitable year in corporate history, surpassing even the overinflated oil prices years of Exxon, and they’re called a “broken” company. Try to comprehend that nugget.
Insightful. Well done. The market has changed since the dot.com bubble of a decade or so ago. Today a company must take huge risks, whether they result in revenue growth and profits or not. Amazon is taking a risk with the Kindle. It hasn’t yet made any profit and whatever revenue there is is not being reported. Still, Wall Street loves the ‘hubris.’ Google, too, is adventurous. Android is a failed risk– so far– but might have promise if the company executes better. Wall Street loves the risk. If Google stumbles their stock will be beaten into submission.
sub·si·dize
1. Support (an organization or activity) financially.
2. Pay part of the cost of producing (something) to reduce prices for the buyer.
“Maybe not in the U.S., but certainly in countries where carriers don’t subsidize smart phones.”
Carriers don’t subsidize phones. They loan you the money up front and get it back through monthly instalments. The end-user still pays. Why perpetuate this myth?
That’s nonsense. Language is dynamic. In the U.S. carriers most definitely ‘subsidize‘ the purchase of the smart phone. It’s a common term that’s been in use for years to describe what carriers do to keep their customers happy and tied to their monthly plans.
The thing to remember here is that language is about usage, not rules. Definitions are not etched in stone. They’re dynamic and fluid; they change. This one in particular is dynamic, whereby subsidy is used to denote how a carrier helps a customer pay for a smart phone through a monthly plan.
Apple is between a rock and a hard spot and the pressure is unlikely to let up any time soon. The market is all about perspective and emotion, not numbers. Apple is perceived as mature, perhaps even aging, rather than the arrogant upstart of a few years ago. Numbers just don’t matter that much. At first. If a company takes a risk and the numbers don’t pay off, then the market beats down the stock. Apple is perceived as innovating and disrupting markets year after year. That’s not historically accurate, but so what? Perception is reality. Apple needs another hit product and there’s not one in the pipeline.
Hmm. What is that $10-billion capital expenditure?
How in the world do you know there’s not another hit product in the pipeline? Apple didn’t pre-announce the iPod, iPhone, or iPad before they launched to massive success and disruption. Only Johnny Ive, Tim Cook, and a select few others know exactly what Apple has in the pipeline, but you can be sure they’re working on new products.
In every case– iPod, move to Intel CPUs, iPhone, and iPad– news leaked out a few months ahead of time. There were rumors about the iPod just before it launched. The iPhone rumors were rampant and very accurate. The iPad was actually expected– rumors had screen size, dimensions, capabilities, and price– spot on, when Jobs announced it. The pipeline had great products and hints, tips, and rumors preceded each one. Even the iPad mini had specs and details that proved spot on weeks before it launched.
Where’s the news today about Apple’s next great thing?
The pipeline is empty.
And they have been no shortage of similar rumors. I have no idea if any of them are true or not, but perhaps you’ve heard of the new Apple television, or the new Apple console, or the new Apple watch. Rumors or many new Apple products are easy to find. Perhaps you’re sure none of those are real or will be a hit. You’d be hard pressed to find anyone who thought the iPod would be a hit when it was announced, let alone before the thing launched.
Kate, sorry to say but you are very mistaken about the Mac sales drop and it being a watershed moment…
For two whole months of the quarter Apple did not have iMacs on sale. ie it was a one month quarter for desktops.
Had that been different there would have been a new quarterly Mac sales record.
Face the facts, folks. Mac sales are dropping. Most of the Macs Apple sells are MacBooks, not iMacs. Supply constraint wasn’t there until a week or so before the new iMac was announced, and even now it is a wait. That drop was huge and it can’t be blamed totally on iMac shortages.
The PC era is over. Long live the iPad.
Please. From Cook himself:
“I think the best way to answer this is if you look at the previous year[’s quarter], our Mac sales were about 5.2 million. This year, they were 4.1 million, and so the difference is 1.1 [million]. Let me try to bridge that.
iMacs were down by 700,000 units year over year. As you remember, we announced the new iMacs late in October. And when we announced those, we announced that they would ship—the first one, the 21.5-inch—in November, and we did ship it at the end of November. We announced that the 27-inch would ship in December, and we did ship that in mid-December. And so there were limited weeks of ramping on these products during the quarter.
We left the quarter with significant constraints on the iMac. And we believe—we know—that our sales would have been materially higher if those constraints would not have existed. We tried to tell people this on the conference call in October; I think I said that we would have significant constraints on iMac. But I recognize to some folks, this may be a surprise.
Number two: If you look at last year, as Peter went through in his opening comments, we had 14 weeks in the quarter, we had 13 weeks in the quarter this year. Last year, in the average week, we sold 370,000 Macs.
The third part of the bridge here would be that our channel inventory was down from the beginning of the quarter by over 100,000 units, and that’s because obviously we didn’t have the iMacs in channel inventory and it was in significant constraint.
So if you just take these three factors, they bridge more than the difference between this year’s sales and last year’s sales.”
Tim Cook is spreading a coat of paint to hide the embarrassing scratches. Mac sales were down because we’re in the post-PC era where iPhone and iPad rule. The Mac is yesterday.
Does anyone believe that the 1.1-million difference between 2012 and 2011 was JUST the iMac inventory?
Puhleeze.
Notice that Cook did NOT break down MacBook vs. iMac vs. other Macs in numbers, but only said the iMac sales were off 700,000 units in the quarter from a year ago. Was that because supply was not available or because what was available wasn’t sold? The iMac line is a dinosaur, just like the MacPro.
Get over it already. The Mac is a PC and PCs are on the way out. First, the MacPro, then the iMac, then the MacBook.